Central banks are back on stage

Risk sentiment generally stayed on a strong footing this week as investors heaved a sigh of relief after the US-China phase one trade deal was finally signed. While the bulk of the deal was already known, we learned that US exports to China are set to rise by around USD200bn over 2020 and 2021 with some 20% coming from agricultural goods, 40% from manufacturing and the remainder from energy and services. USD/CNY declined to the lowest level since July and the equity market rally shows no signs of abating yet, also benefitting from an encouraging start to the Q4 reporting season in the US. While movements in the G10 FX space were limited, European core yields experienced some mild downward pressure despite another big supply wave coming to the market last week. We still see room for slightly higher yields in 2020.

Central banks will (re)take centre stage this week. The PBoC is leading the pack with the announcement of its new policy rate (Loan Prime Rate) on Monday, which is widely expected to remain unchanged. China is increasingly scaling down on further easing, preferring instead to make use of other discretionary measures to improve the financing of the private sector. The Bank of Japan is next in line on Tuesday. We expect no changes in rates or the magnitude of the QQE with yield curve control, but we are likely to see an upward revision of the growth forecast in the wake of the government's big spending package. Last but not least, at the ECB meeting on Thursday all eyes will be on the official launch of the monetary strategy review (which we think will be one of the 10 key topics driving markets this year, 13 January). While the clouds on the euro area growth horizon have cleared somewhat and core inflation has shown some robustness as of late, we still think it will be too early for ECB to strike a more upbeat tone on its growth risk assessment at the meeting.

January PMIs released on Friday will round off the week and give us some important clues how the global economy (and especially the manufacturing sector) has started 2020. Following a VAT hike in October, Japanese PMIs have nosedived and it might be too early for a rebound in light of still weak foreign demand. In the euro area we have seen rays of light in leading indicators lately and we are looking for a further small uptick in the manufacturing PMI this month to 47.1, adding to evidence that the worst of the industrial slump is behind us and export order books are recovering. In the US, a strong Philly Fed index in January gives hope for a similar uptick in PMI.

The January PMI signal will be closely watched particularly in the UK, where another weak reading of the monthly GDP print last week (indicating annual growth of a mere 0.5% - the lowest since the European debt crisis) fuelled market expectations of a Bank of England rate cut in the coming months. Markets are currently pricing a 75% probability of a cut at the 30 January meeting. Another lacklustre PMI print (we are looking for 50.7 for services and 48.5 for manufacturing) signalling growth close to zero, might be enough to tip the scale in favour of a January cut and trigger more GBP weakness ahead.

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